Tariff Policy - Protectionist backsliding

Fordney-McCumber coincided with a general rise in tariffs worldwide, as
new nations formed out of the Austro-Hungarian empire sought to protect
their industries. America, Britain, and other big powers called several
international conferences—in Brussels in 1920 and Genoa two years
later—to stop the increase in protectionism. But when these nations
looked to the United States for leadership, they found—with passage
of the Fordney-McCumber duty hikes—that America still elevated its
domestic economy over foreign considerations in tariff policy. When the
law passed, America was the world's creditor but, ironically,
possessed the world's highest tariffs. Unable to negotiate down
U.S. customs rates, European and Latin American nations revised their
tariffs upward between 1926 and 1929. Three of the major British
dominions—Australia, New Zealand, and Canada—responded
likewise.

This tariff war alarmed the League of Nations, which called a world
economic conference in Geneva in 1927. The representatives, including an
American, resolved to terminate all prohibitions on imports. This was too
bold for many nations, which attached reservations and loopholes. The U.S.
delegate railed against high tariffs but focused on those in Europe, not
in America. The Geneva meeting failed to stop the climb in tariff levels.
Germany and Italy immediately raised tariffs against imported wheat,
thereby escalating the world tariff war. In this context, the infamous
Smoot-Hawley Tariff Act of 1930 (proposed in 1929) culminated the cycle of
protectionism that liberal traders had feared for decades. The fallout was
positive, however, for it transformed tariff policy into an
internationalist instrument.

The initial trade-policy response to the Great Depression pointed in a
protectionist direction under the Smoot-Hawley tariff. Historians continue
to debate whether or not Smoot-Hawley represented the highest tariff in
American history, worsened the Depression, or sent chills into the stock
market. The large majority of twentieth-century economists, politicians,
diplomats, and students of international affairs believed the worst, but
there is reason to believe this perspective exaggerates the case. Research
reveals that earlier tariff levels on dutiable goods regularly exceeded
those of Smoot-Hawley. The Tariff of Abominations raised the average ad
valorem rate (set on a percentage of value) on dutiable imports to a
higher level than the 1930 legislation. Scholars should be skeptical of
weighing the effect of tariff levels too heavily when trying to show their
impact on the Great Depression; demand and supply conditions and currency
rates had much more influence. And a close reading of stock market
fluctuations and the battle over Smoot-Hawley in Congress shows no
correlation between the law and the bear market. Thus, a
"myth" of Smoot-Hawley arose, perpetuated by free-trading
economists and Democrats seeking to wrest control of the White House by
blaming the Depression—and the rise of militarism in Europe and
Asia—on selfish, shortsighted, and provocative Republican tariff
policy.

Still, such conclusions were beyond commentators and policymakers at the
time. In reality, perception was critical, and the tariff act indicated to
foreign observers that America had chosen the path of economic
nationalism. In short, Smoot-Hawley's timing was atrocious. World
trade, both exports and imports, plummeted in value by 40 percent and by a
quarter in volume from 1929 to 1933. That spooked U.S. investments, which,
along with any hopes of loans to Europe, dried up. In a vicious economic
cycle, the resulting defaults by foreigners holding U.S. loans led to
further instability and slumps in Europe, which were echoed in America.

Journalists exaggerated the intensity and number of protests abroad
regarding Smoot-Hawley, but governments did rally against the legislation.
France, Argentina, Japan, and others assailed the law as it wended its way
through Congress. Thirty-eight nations urged the Senate to reject it,
while American liberals warned that the high tariff was a threat to peace.
Switzerland, which exported almost all of its watch and clock production,
suffered a 48 percent decline in sales to the United States as a result of
Smoot-Hawley rates. The Swiss called for a consumer boycott of U.S. cars
and typewriters as a response. Mussolini's Italy criticized the
high tariffs on agricultural imports and, in retaliation, mounted a
campaign against American autos that fizzled when the Italians realized
that reprisals would jeopardize their olive oil and tomato exports to the
United States. Spain imposed higher duties on bicycles and wine from
France, in reaction to the unconditional MFN treatment given to third
countries. In effect, although there was less foreign retaliation
following passage of Smoot-Hawley than claimed at the time, the impact of
American protectionism came in the form of uncooperative commercial
relations in the international arena.

For example, the British Commonwealth did not directly retaliate against
Smoot-Hawley when it forged the Ottawa Agreement of 1932, but the
discriminatory duties and quotas against non-empire sources, especially
the United States, were deemed a natural outgrowth of the measure for
nations seeking a quid pro quo. Under the agreement, free trade flowed
between Britain and its dominions but high tariffs faced America. In 1930,
nearly three-quarters of U.S. exports entered Britain free of duties, but
two years later, about one-fifth enjoyed such status. Smoot-Hawley
prompted the British nations to circle their wagons around imperial
preferences that the United States then spent the next three decades
trying to eliminate in extensive tariff negotiations. Also, Canadians
erupted over American tariff hikes on farm goods during their national
election. Running for reelection, Prime Minister Mackenzie King issued
countervailing duties in May 1930 to bolster his image as a protector of
Canadian economic interests. The international trade situation was begging
for a peaceful resolution.